2.3 AD/AS Flashcards
What is aggregate demand?
Total demand for goods and services produced in an economy over a period of time
What is the relationship between AD and real GDP?
Inverse relationship
Why does the AD curve slope downwards?
- Wealth effect: price level rises lead to less disposable income
- Interest effect: price level rises mean people demanding more loans, increasing interest rate
- International trade effect: rising price mean exports more expensive + imports more competitive, increasing demand
ALL DECREASE AGGREGATE DEMAND
What are the 6 determinants of consumption?
- Level of household indebtedness
- Consumer confidence
- Interest rates
- Wealth
- Income taxes
- Future price expectations
What are 4 determinants of investment?
- Interest rates
- Animal spirits
- Technology
- Corporate taxes
What are the 2 determinants of government expenditure?
- Political priorities: spending depends on governments aims/objectives
- Economic priorities
What are 3 determinants of exports?
- Income of trading partners
- Exchange rates
- Trade policies
What is aggregate supply?
Total volume of goods/services produced in an economy
Why does SRAS slope upwards?
As prices rise, more firms are incentivised to enter the market, increasing output
What are 3 determinants of SRAS?
- Labour costs/Raw materials
- Exchange rates
- Income taxes/tax rates
What do neoclassical economists believe?
Market forces lead to the best outcome for society, so government should not intervene in the allocation of resources
What is the shape of the neoclassical LRAS curve?
- Perfectly inelastic
- In the long run, the economy always operates as Yfe
What causes a shift in the neoclassical LRAS curve?
The quantity and quality of factors of production
What are the 3 stages of keynesian LRAS?
- Keynesian
- Intermediate
- Neoclassical
Describe the keynesian stage
Low levels of output and employment, there is spare capacity in the economy. Firms can increase output without increasing costs
Describe the intermediate stage
Output increases and economy moves closer to Yfe, putting pressure on factors of production. Resources become scarce
Describe the neoclassical stage
At Yfe, all resources being fully utilised and output cannot increase further
Why dont price levels descend beyond a certain level in keynesian LRAS?
- Minimum wage laws
- Trade unions
- Contracts
What is macroeconomic equilibrium?
Aggregate demand = Aggregate supply
What is the difference between positive and negative output gaps?
Positive: actual GDP > potential GDP
Negative: actual GDP < potential GDP
Formula for multiplier
1/(1-MPC)
What is the multiplier effect?
When an initial injection into the circular flow causes a bigger final increase in real national income
What is the marginal propensity to consume?
The proportion of an increase in income that a person/household is likely to spend on consumption
What is the marginal propensity to save?
The proportion of a extra income that a consumer saves rather than spending on consumption
What is the marginal propensity to tax?
The proportion of extra income that is paid in taxes
What is the marginal propensity to import?
The proportion of extra income spent on importing goods/services
Draw:
Classical + Keynesian AD/AS diagram
What is the main difference between Classical and Keynesian theory?
- Classical = free market (flexible prices ensure market equilibrium)
- Keynesian = interventionist (government intervention is inevitable)
What are 4 determinants of LRAS?
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Demographics/migration
